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I’ve Heard of the DJIA and S&P, but What Is The Russell 2000?

Trying to figure out what the russell 2000 is? This index is one of the many indices you can use to monitor stock markets. Basically, an index works by compiling a number of stocks to create an easy to track index that investors can use to monitor the overall health of the stock market, or a particular industry and/or segment.

In the United States, the “big three” stock indices are the Dow Jones Industry Average, the Standard and Poors 500 (S&P 500), and the NASDAQ. The DJIA is a collection of America’s 30 biggest and most respected publicly traded companies. In theory, by watching these companies investors can get a pulse on the overall economy. The S&P 500 is similar to the DJIA in that it tries to cover a range of industries, but instead of thirty companies, there are five hundred. The NASDAQ tracks the NASDAQ exchange, on which over 3,000 companies are traded. The NASDAQ is known for having a bit of a tech focus, but also contains numerous non-tech companies.

So what then is the Russel 2000? As you already know, it is another index. And as you might have guessed, it contains 2,000 companies. The Russel 2000 index is actually a sub-index of the Russel 3000 index, which contains 3,000 companies (surprise!). So what specifically is the russel 2000 and what makes it different? It is a “small-cap” index, which means it is designed to track small cap stocks.

The Russell 2000 and Small Cap Companies

While the DJIA tracks the United States thirty biggest firms, and the S&P 500 tracks the 500 biggest firms, the Russell Index specializes in smaller companies. You won’t find General Electric and Apple Inc on the Russell 2000 indice. Instead, you will find companies that aren’t exactly household names, like Puma Biotechnology and CNO financial group.

Many of the companies tracked via the Russel index are still worth billions and hundreds of millions of dollars, so they aren’t exactly mom and pop shoppes. Yet a company worth three billion dollars is still a long way off from a true industrial titan like Apple and Google, both of which are worth hundreds of billions of dollars.

With the Russel index, you can easily monitor the overall performance of small and medium cap companies. Watching small companies is important for several reasons. For one, smaller cap companies offer great opportunities to turn profits, though risks are higher. Two, keeping an eye on a russell 2000 chart is a great and easy way to keep an eye on the overall health of the economy.

Small-cap companies are great because they have more room to grow. Remember, at one time Google and Apple were both much smaller companies, worth billions or even millions rather than hundreds of billions. Since then both companies have grown a lot, and those investors who invested when the companies were young and worth less money, have been able to enjoy huge gains.

Smaller companies, however, face a much higher risk of going broke. For every Google, there are numerous other small companies that simply failed and are no longer even remembered. So while the potential for big gains is greater when investing in Russel 2000 listed companies, the risks of failures are also much higher.

Investing in the Russell 2000

One of the problems with investing in smaller cap companies is that the risks are higher. If you’re a bit risk adverse and don’t want to spend the time needed to dig through the thousands of small cap options out there, one option is a russell 2000 etf. An etf refers to exchange traded fund. Basically, ETF’s track indexes. So just as indices like the Russell track stock markets, ETF’s track indices. If the index in question rises, your ETF will gain value. If the index drops, you will lose value.

A russell 2000 exchange traded fund is a great option for investing in small cap companies. By investing in this etf, you are basically investing in 2000 different companies. If a few companies fail, so what? So long as more companies are gaining ground, you’ll earn money.

Exchange traded funds are also great options for investors because they often feature lower fees. Why? Funds that are managed directly by investors have to pay professional money managers to select the stocks that go into the fund. Since ETFs are pegged to indexes, there is no need to hire such expensive money managers.

As a result, you generally pay less in fees when investing in a DJIA ETF, or S&P ETF, or in this case Russel 2000 ETF.